Fractional Shares: Remember, there was a time when most of us wished our parents or grandparents had invested at least Rs. 10,000 in MRF (Rs. 1,19,747)? If they had, we might be rich by now, avoiding the struggles of job hunting, and life would have been easy.
Now, there are other expensive stocks in India like Page Industries (Rs. 37,352), Honeywell Automation India (Rs. 36,000), Shree Cement (Rs. 28,701), and Abbott India (Rs. 22,899), among others, but most of us don’t have a portfolio large enough to have these shares.
Even if the portfolio size is somewhere around Rs. 5 lakhs, owning any of these three shares or other highly-priced shares will hamper the investor’s portfolio for sure.
So, how can you buy these costly shares without draining your bank account?
The answer is fractional shares. This could soon be possible, all thanks to the Securities and Exchange Board of India (SEBI), which is working on introducing the concept of fractional shares.
What are Fractional Shares?
Fractional shares represent a fraction of a full share of a company, which are expensive or high-value stocks that allow you to own a part of it without having to pay a huge price.
These fractions often come from corporate actions like stock splits, bonus shares, mergers, acquisitions, or dividend reinvestment.
Right now, these fractional shares are non-tradable on the market, meaning investors can’t buy or sell them.
Still confused? Let’s look at an example with MRF!
Suppose you want a share of MRF Company, each share costing Rs. 1 lakh. For normal investors, that’s a lot!
Without fractional ownership, you could only buy one share, even after spending a large part of her equity portfolio. However, if the same share is available in 100 fractions, where each unit represents 1% ownership of the underlying stock, you can choose to own 10 fractional units for Rs 10,000.
This way, you can allocate the rest of your money across different stocks to ensure adequate diversification.
What advantages do Fractional Shares offer to investors?
I. Promote Diversification: Spread your investments across a wide range of stocks and make it easier to diversify your portfolio.
II. Risk Management: Owning fractional shares helps spread risk across multiple investments, reducing the impact of poor performance by one stock on your overall portfolio.
III. Increased accessibility: Allows small investors to access expensive stocks they might not afford in whole units, expanding access to high-value shares for retail investors.
IV. Cost-Efficient: Efficiently allocate your funds by investing in fractional shares, leading to better capital utilisation.
What’s the situation in India right now?
In the US markets, the idea of fractional ownership is already permitted, and many Indian investors have bought fractional shares of big companies like Apple, Meta, Tesla, Netflix, Microsoft, and Alphabet, among others. However, in India, there’s a problem!
The Companies Act says subscribers must agree to subscribe to a minimum of one full share and prohibits the purchase, sale, or trading of fractional shares.
However, SEBI is working with the Ministry of Corporate Affairs (MCA) to change this Act. If successful, individual investors in India might soon be able to own fractions of shares in their favourite Indian companies.
The proposal to allow fractional shares was suggested last year and came in the wake of an increase in 1.42 crore retail equity market investors during the pandemic.
However, fractional ownership concepts are already present in a few of the other asset classes, including real estate, and some startups offer platforms to take part in fractional investments in physical assets for investors.
So, what’s your take on this? Do you see any challenges with SEBI introducing fractional shares in India?
Written By Shivani Singh
By utilising the stock screener, stock heatmap, portfolio backtesting, and stock compare tool on the Trade Brains portal, investors gain access to comprehensive tools that enable them to identify the best stocks, also get updated with stock market news, and make well-informed investment.
